When externalities are present in market activity and production occurs at P = MC,
A) the market generates an optimal distribution of resources
B) the market does not generate an optimal distribution of resources
C) a free-rider condition always raises price
D) P = ATC as well
E) the firm suffers economic losses

Question

Quizplus · Accepted Answer

When externalities are present, the market does not generate an optimal distribution of resources because the social costs or benefits are not fully accounted for in the market price, leading to overproduction or underproduction relative to the socially optimal level.

When Externalities Are Present in Market Activity and Production Occurs